Nirav Modi impact: RBI scraps letters of undertaking for import trade credits

Reuters

The CBI has alleged that firms controlled by diamond traders Nirav Modi and his uncle Choksi obtained fraudulent LoUs and letters of credit (LCs) worth Dollars 2 billion (Rs 12,636 crore) from PNB in connivance with bank officials.

The RBI added that the aforesaid Master Direction will be updated to reflect the changes.

Meanwhile, PNB has again come up with an additional exposure of about Rs 942 crore in the country's biggest bank fraud case.

Punjab National Bank (PNB) reported fraudulent issuance of LoUs/ Foreign Letters of Credit for payment of import bills and fraudulent transactions in accounts, amounting to Rs 12,967.86 crore, to the RBI through its fraud monitoring reporting system.

"Reserve Bank of India (RBI) has apprised that it had issued two circulars to banks in the months of August and November 2016, related to security and operational controls in the SWIFT environment", minister of state for finance Shiv Pratap Shukla told the Rajya Sabha in a written reply. By giving LoU, PNB agrees to repay the principal amount and interest on the clients (Nirav Modi) loan unconditionally.

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However, letters of credit and bank guarantees will continue upon meeting certain conditions, the central bank said in a press statement.

PNB, the second largest state-run bank, had on February 14 informed the exchanges of detecting Dollars 1.77 billion fraud at its Brady House branch in Horniman Circle area of south Mumbai and named the firms led by Modi and his uncle Mehul Choksi's Gitanjali Group and some other diamond and jewelry merchants as suspects.

Thus, many Indian banks' overseas branches sanctioned forex credit. Banks charge a fee from the importer for the LoU.

The RBI decision could potentially push up the cost of imports by up to half a percentage point, besides putting foreign banks on an even keel with Indian banks in financing imports, bankers said.

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